The bonds are secured by an unlimited ad valorem pledge on all taxable
properties within the district.

KEY RATING DRIVERS

IMPROVED FINANCIAL FLEXIBILITY: The Positive Outlook is based on the
district's improved financial flexibility following several consecutive
years of operating surpluses and increased reserves, as well as the
resolution of outstanding legal claims and voters' recent approval of a
parcel tax extension.

RISING REVENUES: As a basic aid district, general fund revenues derive
primarily from local property taxes, which have experienced steady
growth. The district's basic aid status also insulates it from funding
volatility associated with state budget pressures.

LIMITED ECONOMY: Development opportunities within the district's
boundaries are limited, and population growth has been negative in
recent years. Nonetheless, median household incomes are well above state
and national averages and per capita market values are high.

MIXED DEBT PROFILE: The district benefits from a low debt burden and
amortization is above average, in part due to the planned repayment of a
county loan in the current fiscal year. Further borrowing is
constrained, however, by debt service on the district's outstanding
bonds, which is close to statutory limits.

RATING SENSITIVITIES

SUSTAINED FINANCIAL PERFORMANCE: Continued structurally balanced
operations, in combination with maintenance of adequate reserves, would
likely result in an upgrade of the district's rating.

CREDIT PROFILE

The district serves approximately 350 students across two communities
within a 16 square-mile portion of unincorporated San Mateo County. La
Honda is a residential enclave within commuting distance of Silicon
Valley employment centers while Pescadero is a somewhat isolated
agricultural community on the San Mateo coast. Much of the land within
the district's boundaries is protected open space, limiting
opportunities for new development.

IMPROVED FINANCIAL POSITION

The district has recorded operating surpluses in each of the past five
fiscal years and unrestricted fund balances have risen to a high 45% of
general fund spending, or $2 million at the end of fiscal 2013. While
management plans some spend-down of this amount over the next several
years to offset expiring federal funding, Fitch expects reserve levels
to remain adequate. Rising revenue levels, in combination with stable
costs, have contributed to the district's strong recent results. The
district has held general fund expenditures to an average 0.5% annual
increase over the past five years while revenues have grown by a
corresponding 2.5%.

The district's financial position has also been strengthened by the
resolution of outstanding legal claims relating to an erlier
construction project. In fiscal 2013 the district recovered $2.2 million
from involved parties and management plans to use a portion of these
funds to repay an outstanding loan from the county office of education
in the current fiscal year.

RISING REVENUES

As a basic aid district, the district receives more local property tax
than it would otherwise be entitled to from state per-pupil revenues,
allowing it to forego most state funding. These arrangements insulate
the district's revenues from state funding volatility, a major challenge
for most other K-12 districts in the state over the past few years. The
district has also benefited from a strong tax base. Taxable assessed
values (TAV) increased throughout the recent downturn, contributing to
steadily rising revenues.

In addition to ad valorem property taxes, the district receives
approximately $200,000 per year in local parcel taxes. District voters
recently approved an extension of this tax for seven years, through
fiscal 2021.

LIMITED ECONOMY

The district offers limited opportunities for economic development. Much
of the district's land area is protected open space and most employment
is based in agriculture or tourism. Population growth has been negative
in recent years as have school enrollment levels. Nonetheless, wealth
and income levels remain high due to the district's proximity to San
Francisco Bay Area population centers and the desirability of its
coastal location. Median household incomes for the district are twice
the state average and assessed value per capita is a high $194,000.

MIXED DEBT PROFILE

The district's overlapping debt burden is moderate on a per capita basis
at $3,289, and low relative to TAV at 1.8%. Amortization is above
average with 63% of outstanding debt retired within the next 10 years,
in part due to the planned repayment of a county office of education
loan in the current fiscal year.

The district retains $9 million in GO authorization from a 2006 election
but has been unable to issue new debt due to statutory tax rate limits
at issuance of $60 per $100,000 of TAV per year. The district's tax rate
on outstanding debt from the 2006 election is currently at $52 per
$100,000. Some combination of TAV growth and restructuring of existing
debt would likely be necessary before the district could issue new GO
debt.

The district participates in two state-sponsored employee pension plans
and is likely to face ongoing increases in contribution rates to address
substantial unfunded liabilities. Funding for CalSTRS is a particular
concern, as statutory contribution rates remain well below the level
required to amortize existing obligations. Carrying costs for debt
service and retirement benefits are currently affordable at 12% of
governmental expenditures in 2013, but are likely to rise over the next
several years.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.